TOKYO - The dollar edged up on Tuesday but buying was light as investors remained cautious ahead of a U.S. interest rate decision and, later in the week, current account data that could underscore bearish sentiment on the currency.
Any positive effect from an expected rise in U.S. rates later in the day could be quickly lost if figures for the U.S. current account in the third quarter, due on Thursday, show the deficit widening significantly.
"If the current account deficit is very large, the dollar will fall, so people don't want to buy the dollar ahead of that data," said Tohru Sasaki, chief currency strategist at JPMorgan Chase.
A slight recovery in the dollar ended on Monday, due partly to worries about the ability of the United States to fund its current account and budget deficits, and the currency is widely expected to start dropping again, resuming a slide that took it to a record low of $1.3470 per euro last week.
Sasaki said the U.S. currency could also fall below 102 yen again before the week was out, depending on the data.
At 9:45 p.m. EST Monday the dollar was around 104.95 yen up marginally from 104.84 in late New York trade but well off a one-month high of 106.20 hit on Friday.
Just over a week ago it hit a five-year low of 101.83 yen.
The euro bought around $1.3290 down from 1.3310 in late U.S. trade but still about 1.5 cents above Friday's two-week low of $1.3139.
The euro fetched around 139.45 yen little changed from the late U.S. level but in sight of an 18-month high of 139.89 marked on Friday.
The consensus forecast for the current account, the broadest measure of U.S. trade with the rest of the world, is for a $170 billion deficit versus a $166.18 billion shortfall in the second quarter.
Before that, the market has to contend with U.S. trade figures for October on Tuesday. The U.S. trade gap is seen swelling to $53.0 billion from $51.56 billion in September.
Dealers were also keen to see the U.S. Treasury's investment flows data due on Wednesday, which will show the amount of foreign money coming into the U.S. economy in October.
DOLLAR POSITIVES
The U.S. Federal Reserve is widely expected to raise its benchmark short-term Fed funds rate by a quarter of a point to 2.25 percent.
That would be more than double the level in June and take it above the equivalent euro zone rate, now at 2 percent, for the first time in more than three years.
The Fed's post-meeting statement will also be scrutinized for any hints of further rate rises next year.
"If they come out with 25 basis points -- and I can't see them drastically altering their wording of the statement because they know the market impact -- I think we'll see a brief dollar rally," said Luke Waddington, head of currency dealing at Royal Bank of Scotland.
Higher U.S. interest rates are seen helping the dollar by attracting more global funds to short-term U.S. assets, and any retreat in expectations on rate rises could hurt the currency.
The U.S. Treasury bond market is pricing in a rate of around 3.5 percent by the end of next year.
The dollar may also be helped against the yen by Wednesday's Bank of Japan "tankan" survey, which is expected to show a deterioration in business sentiment following a raft of recent data that showed Japan's economic recovery slowing.
Economists in a poll forecast a reading of 23 for the diffusion index of large manufacturers' sentiment, down three points from 26 in the last survey, which was the highest level since the early 1990s.//